INDIA’S NEW PRODUCT PATENT REGIME: AN ANALYSIS OF …
Transcript of INDIA’S NEW PRODUCT PATENT REGIME: AN ANALYSIS OF …
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International Journal of Social Science & Interdisciplinary Research
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INDIA’S NEW PRODUCT PATENT REGIME: AN ANALYSIS OF
RANBAXY’S R & D EXPENDITURE AND BUSINESS
STRATEGIES IN THE POST-TRIPS PERIOD
GEETANJALI DESHMUKH*; DR. S.S.SAHASRABUDHE**
* Management Faculty
Chh. Shahu Institute of Business Education and Research
(SIBER)Kolhapur, India.
** Principal, ATSS College of Business Studies & Computer
Application. Pune.
ABSTRACT
Non-recognition of product patents for drugs under the Indian Patent Act, 1970 was largely
responsible for the rapid growth of the indigenous Indian pharmaceutical industry. The recent
signing of the TRIPs agreement, however, reverses the patent law followed since the 1970s. The
firms that have developed knowledge and capabilities in reverse engineering-based R&D in the
past are required to reorient themselves for R&D-based innovation to survive and compete in a
regulated and open market. The principal objective of this research paper is to investigate the
strategies adopted by one of India’s leading pharmaceutical company, viz, Ranbaxy Laboratories
Ltd., in response to the new and challenging business environment brought about by the
introduction of the new patent regime. The study reveals that Ranbaxy adopted a “High-Risk-
High- Returns” strategy, both in R&D as well as in its attempt to become a global company.
Eventually, the increasing expenditure on risky R&D, patent challenges with inadequate returns,
high cost Acquisitions in foreign markets and setting own manufacturing & selling facilities
abroad in order to increase its geographical presence, took its toll on the financial health of the
company. Consequently, Ranbaxy had to redefine its business model and in 2008 the company
brought in Daiichi Sankyo Company Ltd. to create a strategic combination of an innovator and
generic powerhouse.
KEYWORDS: IP(Intellectual Property), IPR(Intellectual Property Rights), R&D(Research &
Development),TRIPs(Trade-Related Aspects of Intellectual Property), NDDS(Novel Drug
Delivery System), NCE(New Chemical Entity),CRAMS( Contract Research and Manufacturing
Services).
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1. INTRODUCTION
The level of IPR (Intellectual Property Rights) influences the corporate sector in more than one
ways. For example, the level of patent protection in a country greatly influences the domestic
pharmaceutical industry in terms of its growth, R&D (Research & Development) investment,
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technology and export capacity and the overall business strategies employed by the firms. In case
of the Indian pharmaceutical industry, it was the lack of strong IP(Intellectual Property)
protection that was responsible for its remarkable growth. The passing of the Indian Patent Act,
1970, which did not recognise product patents for vital areas like food, drugs and atomic energy,
fuelled the rapid growth of the indigenous industry. The foundation of the success experienced
by the Indian pharmaceutical industry at the later stage was laid down in the 1970s. The recent
signing of the TRIPs agreement (Agreement on Trade –Related Aspects of Intellectual Property),
however, reverses the patent law followed since the 1970s. The firms that have developed
knowledge and capabilities in reverse engineering-based R&D in the past are required to reorient
themselves for R&D-based innovation to survive and compete in a regulated and open market.
This has serious implications for the Indian pharmaceutical firms.
Several studies have been conducted by industry experts, academicians, various governmental as
well as pharmaceutical industry bodies ASSOCHAM,IDMA,BDMA; banks like the EXIM
Bank and the Deutche Bank; international organizations like the United Nations . These research
papers, reports and studies undertaken, show the growth of the Indian pharmaceutical industry ,
its export performance, R&D activity , while some have analysed the emerging business
opportunities/challenges before the Indian pharmaceutical industry in the post-TRIPS era . To
mention a few from among the reviewed literature- Lanjouw (1998) discusses the various
theoretical implications for a developing country of introducing product patents for
pharmaceuticals using India as an example.1 Nauriyal and Sahoo (2007) focus on the
performance of the Indian pharmaceutical industry during the deregulated period from 1995 to
2006, the nexus between R&D expenditure and growth performance of the pharmaceutical
industry and specifies a model to evaluate the performance in the light of the patent, R&D
expenditure and the marketing strategies of the firms in the industry.2
Dinar kale (2007), in his
working paper explores the motives and patterns of internationalization by the Indian
pharmaceutical firms directed towards expansion in foreign markets and accessing new
technologies.3
Greene (2007) in his working paper presents an overview of India’s
pharmaceutical industry and its evolution from almost non-existent to one of the world’s leading
suppliers of generic drugs.4
Chaturvedi, Kalpana and Chataway, Joanna (2006) examine the
contemporary strategic approaches adopted by Indian leaders for integrating new knowledge and
capabilities in order to develop innovation competencies for tomorrow.5
Rao.M.B.and Guru
Manjula in “WTO and International Trade”, provide complete framework of the TRIPS
Agreement.6
ASSOCHAM’S “ White Paper on IPI-Quest for Global Leadership”(2006)
highlights India’s global competitive strategy, industry partnership & alliances, CRAMS &
clinical trials and drug discovery & development.7
EXIM(2007)Bank’s research finding’s
suggest that the growth momentum of the IPI, after the challenges posed by the WTO regime,
has gained momentum and many Indian pharmaceutical companies have not only shown good
performance domestically but have also been able to establish their foothold in overseas
markets.8
Chaudhuri,Park & Gopakumar(2010)in a study commissioned by the United Nations
Development Programme (UNDP) analyse the role of both, the Indian pharmaceutical industry
and the Indian legal system in its contribution as a supplier of affordable medicines, five years
after having complied with the TRIPS Agreement, focusing mainly on the future of affordable
generic HIV/AIDS drugs supplied by Indian generic producers.9
Annual Report (2003-2004)
Department Of Chemicals And Petrochemicals Ministry Of Chemicals & Fertilizers Government
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Of India New Delhi, shows the performance of the pharmaceutical industry in production,
exports and imports.10
With the objective of understanding the implications of re-introduction of
product patents for pharmaceuticals in India, this research paper carries out an in-depth analysis
of the R&D expenditure and business model adopted by one of India’s top pharmaceutical
company, viz, Dr.Redyy’s Lab ( henceforth referred to as DRL) and includes the R&D
expenditure, business strategies, internationalization motives and patterns adopted by DRL in
the post-TRIPS period under the new product patent regime.
1.2 METHODOLOGY ADOPTED:
The basic objective of this research paper is to study whether the TRIPS-compliant Patent regime
has resulted in significant changes in the R&D expenditures of Ranbaxy and also to Investigate
the strategies and behavioural patterns adopted by this company in response to the new IP
regulatory framework brought about by the introduction of the new patent regime in the post-
TRIPS period.
In order to complete the present research and analyse the data in the right perspective, the Desk-
Research method and Survey method have been adopted. In this, access to the various sources of
information was of immense use in compiling and analysing the data. Similarly self- constructed
questionnaire was sent to the selected pharmaceutical company. On the basis of the feedback
received from the respondent, the data has been analysed.
The scope of this research paper is confined to the Indian Pharmaceutical industry and the
implications of the new product patent regime on the R&D aspect. It focuses on one of India’s
top pharmaceutical company, viz, Ranbaxy Laboratories Limited (Ranbaxy). With the
implementation of product patents in India in January 2005, investing in R&D became inevitable
for the pharmaceutical companies. Under the new product patent regime, a shift in the model of
R&D investment by Indian companies from core process research to new drug development and
novel drug delivery systems (NDDS) became very significant.
1.3 RESULTS AND DISCUSSION -
Research & Development is the key to the future of pharmaceutical industry. The pharmaceutical
industry is a science–based knowledge-driven industry, which depends heavily on R&D for new
products to fuel its growth. However the costs involved in R&D are exorbitant. For instance, cost
of developing one new drug in the US increased from $54million in 1970 to $231 million in
1990. Moreover R&D activity is characterized more by failure than by success. Recent studies
indicate that 1 out of 5000-10,000 compounds synthesized during applied research eventually
reaches the market. Other estimates indicate that of 100 drugs that enter clinical testing phase
1(3), about 70 complete phases I, 33 complete phase II and 25-30 clear phase III. Only two-
thirds of the drugs that enter phase III a re ultimately marketed. Because of these reasons and due
to the protected policy regime, the R&D investment in India has been very low and started
picking up only in the 1990s (N.Lalitha, 2003).
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The R&D expenditure of Ranbaxy was negligible during the pre-TRIPS period( Rs.35.01 crores
in1995). This was because, with process patents being recognized under the Patents Act of 1970,
the Indian pharmaceutical industry did not invest highly on R&D of drugs as the legal provisions
allowed production of generic drugs. However, with the impending TRIPS Agreement, change in
patent laws and policy scenario, the industry was forced to re-visit its business strategy thereby
recognizing the importance of R&D and gradually started increasing its investments in R&D in
order to ensure long term sustainable growth and remain competitive at the global level This fact
is corroborated by the data laid down in Table 1, which indicates a steady impressive increase in
R&D expenditure of Ranbaxy.
TABLE 1: R & D EXPENSES (Rs.Crore)
YEAR R & D EXPENSES
1995 35.01
1996 36.58
1997 45.79
1998 49.87
1999 52.28
2000 45.64
2001 55.39
2002 73.39
2003 77.12
2004 192.17
2005 276.13
2006 399.66
2007 639.33
2008 483.82
2009 460.51
2010 471.38
Source- CMIE, Prowess Database
Graph 1: R & D EXPENSES (Rs.Crore)
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The company steadily increased its R&D expenditure from Rs.35 crores in 1995 to Rs. 45.64 in
2000, which is a percentage increase of over 30% within a period of five years. During the next
seven years, the R&D expenditure increased from Rs.55.39 crores in 2001 to a whopping
Rs.639.33 crores, again a percentage increase of 1054 % between 2001 and 2007. However the
R&D expenditure dropped to Rs.483.82 crores in the year 2008, with a further decline in 2009
(Rs.460.51) and 2010 (Rs.471.38).(Source: CMIE, Prowess Database ). The reason behind this
drop is that after the first successful NDDS product ciprofloxacin, there were hardly any other
returns from the huge R&D investments Ranbaxy was making.
BUSINESS STRATEGIES
With the re-introduction of product patents, the Indian pharmaceutical industry has been forced
to adopt new business strategies and R&D model,post 2005. In order to face the challenges
posed by TRIPS and to move forward, Indian pharmaceutical companies have evolved
distinctive business models and are going for a combination of co-operate & compete strategy.
The Indian pharmaceutical companies have three strategic choices:
i. to compete,
ii. to collaborate
iii. to follow a combination of Competitive & Collaborative strategies.
Companies with high annual revenues, R&D capabilities and requisite infrastructure are going
for the combination of co-operate & compete strategy.
The emerging business models being adopted by Ranbaxy in response to the changed business
environment have been discussed below.
Ranbaxy is seen adopting a combination of Competitive & Collaborative strategies.
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Ranbaxy’s Competitive Strategies:
1) NDDS : -
The R&D focus is to modify existing drugs so as to develop new formulations, that can be
patented and sold at a higher price. The new formulations include Novel Drug Delivery System
(NDDS) such as, developing a controlled or extended release formulation of existing oral
therapies to reduce side effects or increase patient compliance; developing alternative delivery
routes, including oral as opposed to injectibles, to increase patient convenience and compliance;
and enhancing purification of product to reduce dosing and side effects.
Ranbaxy developed NDDS for ciprofloxacin. It is also actively involved in developing NDDS
in several other therapeutic areas such as gastric retention.
In the area of NDDS, Ranbaxy recorded the most noteworthy success. The firm was able to
develop an improved version of one the new generation antibiotics, viz. ciprofloxacin, which was
developed by Bayer AG and was under patent protection until 2003. Ranbaxy Laboratories was
able to produce a once-a-day formulation instead of the multiple-dose a day therapy promised by
the Bayer formulation. The Ranbaxy formulation assured better patient-compliance and was
hence, considered to be a major step forward. Bayer recognised the improvement and entered
into a licensing agreement with Ranbaxy for its version of ciprofloxacin. Under the agreement,
Ranbaxy Laboratories received US$ 65 million from Bayer over a four-year period, with an
initial payment of US $ 10 million. The agreement allowed Bayer AG to have the worldwide
marketing rights over ciprofloxacin, except in India and the CIS countries where Ranbaxy
Laboratories had the marketing rights.
In 2001, significant progress was made by the company towards developing platform
technologies and products in the area of Oral-Controlled Release system. Ranbaxy initiated the
process of clinical development of its once-a-day formulations of Ofloxacin by filing an IND
application with the US FDA in late 2001.
2) Non Infringing Processes: -
The originator company need not list process patents with the US FDA. So for a generic
company applying for an ANDA, certification for such patent is not required. To delay the
generic entry, the originator company usually takes patents for a large number of processes. In
such a case, the generic manufacturer can develop a non-infringing process i.e. a process that
does not infringe the one patented by the originator company and enter the market with higher
price and margins.
Ranbaxy’s non-infringing process on Cefuroxime Axetil enabled Ranbaxy to be its sole seller for
almost one and a half years in the US market.
3) New Chemical Entites : -
Although by mid-1009s , Indian pharmaceutical companies started investing in R&D with focus
on developing New Chemical Entities (NCEs),none of these companies were involved in the
entire process of drug discovery and development because they were not ready for the start-to-
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end model of NCE research. The limitations came in the form of lack of requisite skills and
funds required for NCE research. So the Indain companies developed a model whereby they
developed a molecule upto a certain stage and then licensed out to partners from developed
nations, mostly MNCs with skills and huge investment capabilities.
Ranbaxy licensed out its NCE RBx 2258 for the treatment of cancer to Schwarz Pharma AG.
This NCE has now been dropped from clinical trials.
4) Patenting Strategy :-
This includes a mixed strategy of both positive as well as defensive patenting.
Ranbaxy uses a patent system to secure its own products which are presently based on NDDS,
polymorphs or novel combinations.
Source- Questionnaires by researcher, Gehl Sampath (2005), Rajnish Kumar Rai(2008),Dhar &
Gopakumar(2006)
Ranbaxy’s Collaborative strategies –
1) In-Licensing Arrangements:-
Under in-licensing, the company acquires the rights to a product from a third party.
Since Indian companies do not have enough new drugs for the domestic market and they can no
longer take drugs from MNCs, they are looking for in-licensing arrangements with MNCs to
lauch their products in India. The arrangements are either pure marketing relationships or local
productiona dnsharing profit margins with the MNC. This strategy helps Indain companies to
bring novel medications to the country at reasonable prices and also makes regulatory procedure
easier and faster.
Agreement between Ranbaxy and K. S. Biomedix Ltd accords Ranbaxy exclusive marketing
rights for TransMID, a biopharmaceutical product used in the treatment of brain cancer in India
with an option to expand this to China and other South East Asian countries (IBEF and Ernst and
Young, 2004b, p. 26).
Co-marketing alliances are taking place not only among Indian and foreign producers, but also
among Indian producers. Recently, Jupiter Bioscience entered into a 10-year co-marketing
agreement with Ranbaxy, under which the company would license out to Ranbaxy five generic
peptide drugs worth US$ 3 billion at innovators price. It is believed that this tie-up helps Jupiter
Biosciences to bring its products to international market rapidly, as Ranbaxy already has strong
presence in the global market.
Ranbaxy and Cipla, have entered into a strategic partnership to jointly market a select basket of
drugs. The alliance will bring forth their strengths in the strongly emerging cardiovascular and
perennial anti-infectives market.
2) Collabarative R&D :-
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Glaxo SmithKline and Ranbaxy have a collaborative R&D arrangement for the development of
new drugs in the areas of infective diseases and diabetes. Ranbaxy and Avestagen Laboratories
have collaboration for the production of NCEs using biotechnological techniques.
Ranbaxy has entered into a collaborative programme with MMN, Geneva for an anti-malarial
molecule, Rbx 11160; and also with Vectura, adrug delivery company for development of
platform technologies in the areas of oral controlled release system.
3) CRAMS-
ONE of the most important collaborative strategy that has emerged recently is CRAMS.
In 2005, CRAMS market in India was valued at USD532.10 million, of which contract
manufacturing accounted for 84% of the total market,while the remaining 16% was accounted by
contract research (excluding clinical trials). Both the segments of CRAMS have registered a
robust growth rate of over 40% in 2005 over the previous year (Cygnus Research).
GlaxoSmithKline has tied with Ranbaxy to work on lead compounds until second round of
clinical trial are completed.
Source : Questionnaires by researcher, Gehl Sampath (2005), Rajnish Kumar Rai(2008)
FACTOR ANALYSIS OF EMERGING STRATEGIES
On the basis of the information collected regarding the business strategies adopted by Ranbaxy,
a detailed Factor-Analysis is carried out . The analysis is based on –
1- Domestic Strengthening
2- Strategic Business and
R&D Choices
3- Globalization Patterns
TABLE 2- FACTOR RATING
HIGH RISK LOW RISK
NCE RESEARCH NDDS
HIGH STAKE PATENT CHALLENGES IN
FOREIGN COUNTRIES
CHALLENGING MNC PATENTS
IN INDIA
HIGH COST AQCUISITIONS NON- INFRINGING PROCESSES
OWN MANUFACTURING & SELLING
FACILITY
SPECIALITY GENERICS
IN-LICENSING
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OUT-LICENSING
COLLABORATIVE R&D
CRAMS
CO-MARKETING & STRATEGIC ALLIANCES
TIE-Ups, JV & ALLIANCES
TABLE 3- SHOWING MARRKET SHARE OF RANBAXY FROM 2000-2009
YEAR MARKET SHARE
2000 5.89
2001 5.7
2002 5.77
2003 7.88
2004 8.96
2005 8.88
2006 7.45
2007 6.49
2008 5.78
2009 5.65
Source- CMIE, Prowess Database
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TABLE 4- DOMESTIC STRENGHTENING
COMPANY PERFORMANCE BASED ON MARKET
SHARE
(2005-2010)
DOMESTIC POSITION
Ranbaxy Sharp decline
From 8.8%(2006) to 5.65%(2009)
Weakened
Source- Based on Researchers own analysis
Interpretation- The above Table shows that Ranbaxy’s share in the domestic market declined and
the company lost its position as market leader (to Cipla).
TABLE 5 -STRATEGIC BUSINESS AND R&D CHOICES OF RANBAXY
A) COMPETITIVE STRATEGIES:
RANBAX
Y
NDDS ✔
NCE ✔
HIGH STAKE PATENT CHALLENGES IN FOREIGN COUNTRIES ✔
CHALLENGING MNC PATENTS IN INDIA ✖
NON- INFRINGING
PROCESSES
✔
SPECIALITY GENERICS ✖
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B) COLLABORATIVE STRATEGIES:
LICENSING DEALS:
i) IN-LICENSING ✔
ii) OUT-LICENSING ✔
COLLABORATIVE R&D ✔
CRAMS ✔
CO-MARKETING &
STRATEGIC ALLIANCES
✔
Source- Based on Researchers own analysis
TABLE 6: GLOBALIZATION PATTERN
MODE RANBAXY
HIGH COST AQCUISITIONS ✔
TIE-Ups, JV & ALLIANCES ✔
OWN MANUFACTURING &
SELLING FACILITY ✔
Source- Based on Researchers Own Analysis
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TABLE 7: ON THE BASIS OF THE FACTOR RATING AS GIVEN IN TABLE 1, THE
INTERPRETATION IS AS FOLLOWS-
HIGH RISK LOW RISK
NCE RESEARCH NDDS
HIGH STAKE PATENT CHALLENGES IN FOREIGN
COUNTRIES
NON- INFRINGING PROCESSES
HIGH COST AQCUISITIONS IN-LICENSING
OWN MANUFACTURING & SELLING FACILITY CO-MARKETING & STRATEGIC ALLIANCES
COLLABORATIVE R&D
CRAMS
OUT-LICENSING
TIE-Ups, JV & ALLIANCES
Source- Based on Researchers Own Analysis
HIGH COST AQCUISITIONS-
Further, in order to expand its global footprint and diversify its product portfolio, Ranbaxy also
acquired a number of foreign generic drug manufacturing companies.
Acquisition History of Ranbaxy
1995 Ohm Laboratories (USA)
2000 Basics (Germany) Bayers generic business
2004 RPG Aventis (France)
2005 18 generic products of Efarmes S.A. (Spain)
2005 Veratide from P&G (Germany)
2006 Unbranded generic business of GSK in Italy and Spain
2006 Trepia in Romania
2006 Mundogen GSK subsidiary in Spain
2006 Belgian company Ethimed NV
2006 Sentek’s Autoinjector business (US)
2006 Unbranded generic business of Allen SpA, a division of Glaxo SmithKline (Italy)
2006- Be Tabs pharmaceuticals, the 5th
largest generic company in South Africa for
US$70 Mn. (Ref: Company Annual Reports)
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1.4 CONCLUSION-
The above analysis indicates that Ranbaxy adopted a “High-Risk-High- Returns” strategy, both
in R&D as well as in its attempt to become a global company.
Eventually, the increasing expenditure on risky R&D, patent challenges with inadequate returns,
high entry costs in foreign markets, numerous acquisitions by the company to increase its
geographical presence took its toll on the financial health of the company.
Consequently, in 2008, Ranbaxy redefined its business model. The company brought in Daiichi
Sankyo Company limited as a majority to create a strategic combination of an innovator and
generic powerhouse. The inability to cope up with these financial troubles is believed to be an
important factor behind the decision of the Indian promoters of Ranbaxy, the Singh family, to
relinquish their control to Daiichi Sankyo. According to the Report of Ministry of Commerce &
Industry, 2008, pp. 42-43, this may have been good for Ranbaxy which needed an influx of funds
but whether this has a positive impact from the point of view of access to medicines is
questionable. Ranbaxy’s activities may be re-oriented to suit the interests of the MNC that
acquired it rather than the generic requirements of developing countries .
Thus,in June 2008, Ranbaxy entered into an alliance with one of the largest Japanese innovator
companies, Daiichi Sankyo Company Ltd., to create an innovator and generic pharmaceutical
powerhouse. The combined entity now ranks among the top 20 pharmaceutical companies,
globally. The transformational deal will place Ranbaxy in a higher growth trajectory and it will
emerge stronger in terms of its global reach and in its capabilities in drug development and
manufacturing.
FUTURE PROSPECTS
By 2012, Ranbaxy hopes to be one of the top 5 generics producers in the world. The Company
will focus on increasing its momentum in the generics business in its key markets of US, Europe,
BRICS and Japan through organic and inorganic routes.
Japanese market offers new growth avenue for Indian generic players. Amongst the key markets
outside the United States and Europe, the Japanese market offers potential to drive significant
growth in the medium term. With healthcare reforms aimed to reduce healthcare budgets and
generic friendly policies being adopted by the Japanese Government, the pharmaceutical market
is gradually opening up to generics. The current generic penetration in Japan, estimated at 6-7%,
is amongst the lowest in the world. As a result, despite being the second largest pharmaceutical
market in the world, the Japanese market ranks only as the sixth largest generic market. The
Japanese Government has set a target of reaching a generic penetration of 30% by 2012,
implying strong growth potential in the market.
The Japanese pharmaceutical market is characterised by a complex regulatory framework,
thereby creating a high entry barrier. Thus, partnerships with local generic companies and/or
acquisitions of local companies are emerging as the likely route to gain presence. Indian generic
players have also made inroads in the Japanese market. The generic pricing in the market
however remains favourable as compared to markets in Europe and the United States. Lupin,
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Ranbaxy and Cadila Healthcare are amongst the front runners. While Lupin gained access in the
Japanese market through the acquisition of Kyowa Pharmaceuticals in 2007. Ranbaxy is
exploring opportunities of marketing its generic products through Daiichi’s distribution network
post its acquisition by the latter.
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